Fitch Helps US Retain Credit Rating But Cuts Outlook

3Dec/11Off

Fitch Helps US Retain Credit Rating But Cuts Outlook

Fitch Ratings reaffirmed its confidence in the US on Monday, but said the outlook was negative after the Supercommittee’s failure to come up with a credible plan to cut spending.

We retained our AAA rating, despite Standard and Poor downgrading of the US in August.

The negative outlook means that Fitch thinks there is more than a 50 percent chance we could be downgraded in the future. With federal debt projected to reach 90 percent of GDP and 20 percent of tax revenue taken up by debt interest by the end of the decade, the outlook right now isn’t great.

“Failure to reach agreement in 2013 on a credible deficit reduction plan and a worsening of the economic and fiscal outlook would likely result in a downgrade of the U.S. sovereign rating,” David Riley, a managing director at Fitch, said in the report.

The failure of the so-called Supercommittee to agree any sort of debt reduction plan has shaken confidence internally and throughout the world. Despite our national debt reaching $15 trillion, our political leaders cannot seem to come to a consensus on how to tackle it.

While we wait for them to make their minds up, the economy can go nowhere. While nobody can understate the challenges the committee faces, it’s difficult to believe that a group of supposedly intelligent people cannot come to some kind of agreement for the good of the country.

Fitch warned that deficit reduction efforts “will not be credible” if they rely on cutting discretionary spending on its own. Economists have said Congress needs to quickly move to slash entitlement spending on expensive programs that offer little to the economy as a whole.

The failure of the Supercommittee to reach a compromise “underlines the challenge of securing broad-based consensus on how to reduce the outsized federal budget deficit,” Riley said.

We are still the economic powerhouse of the world, but confidence in our political leadership and our economy is still low. While our people and our manufacturing capacity sit idle, tax revenues will remain lower than they should be. Combined with the lack of any real momentum means the economy will recover, albeit at a much slower pace.

Fitch imply the outlook is down to Congress to handle quickly and efficiently. Cuts are going to have to be made, and deep ones. We need to reduce spending on Medicare, Medicaid and Social Security but in a way that doesn’t leave our people too hard up.

Failure to tackle these fundamental issues will likely result in a downgrading of our credit rating according to the report.

“In Fitch's opinion, such a level of government indebtedness would no longer be consistent with the U.S. retaining its 'AAA' status despite its underlying strengths,” Riley said.

That means higher interest payments on money we owe, and a lengthening of the time it will take to pay back the staggering amount of money our government owes.

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